5 Basics of Options in 5 Minutes

Discussion in 'Options' started by Tyler York, Mar 6, 2019.

  1. Hey guys,

    My colleague Brandon Rith (formerly a Fidelity FINRA instructor) and I put together a post for college students looking to learn about Options: https://blog.achievable.me/2019/02/28/5-basics-of-options-in-5-minutes/

    Wanted to get your feedback: how did we do? I was aiming for a strong intro to the concept since options are such a common roadblock for new FAs / traders.

    Thank you,
    Tyler
     
  2. tommcginnis

    tommcginnis

    #4 -- lose the part about "lose $10". You only lose the purchase price; you're follow-on comments try to correct this.

    In general, though:
    Do The 3 Basics of Options in 3 Minutes:
    #1: Options are insurance:
    -- a right to buy cheaper (like a sale coupon) on top.
    -- a right to sell higher (like accident insurance on your car) on bottom.

    #2 The premium you pay for that insurance is primarily affected by
    -- the length of time it's good (more time→more $$$)
    -- the distance of the insured price to the desired market price
    (call insurance↓ with higher price, put insurance↓ with lower price)
    -- the expected jitters ("volatility") of the market at that time. (more volatility→more $$$)

    #3 Since options buy&sell insurance, then also, options buy&sell risk.
    Thus understanding the 4 option risk graphs clarifies all sorts of questions...

    [​IMG]


    ((That was fun. :D ))
     
    Last edited: Mar 6, 2019
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  3. MACD

    MACD

    Tommies was much better.
     
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  4. agreed
     
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  5. It would be slightly more descriptive and accurate, at least the way options are used in "real life" to say: Selling a Call (Short) = Bearish to Neutral, and Selling a Put (Short) = Bullish to Neutral. At least in my simple little mind. :)
     
    Last edited: Mar 6, 2019
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  6. Thank you Tommy, this explanation and graphic are a lot clearer!

    Would you be interested in having us include this graphic in our post? Or I can make a modified version that is 'original' if you prefer. I just want to make sure we have the best description possible. And we will credit you too, of course :) (LMK if you have a website or something you want credited more than tommcginnis)
     
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  7. tommcginnis

    tommcginnis

    Wow -- high compliments, guys. Thank you, truly.

    Tyler, the graphic was pulled from a web search -- I just pulled a url from:
    https://powerprofittrades.com/wp-content/uploads/2016/07/risk-graph.jpg

    And I would tweak/clarify #2, so's the whole thing reads

    Do The 3 Basics of Options in 3 Minutes:
    #1: Options are insurance:
    -- a right to buy cheaper (like a sale coupon) on top.
    -- a right to sell higher (like accident insurance on your car) on bottom.

    #2 The insurance premium you pay is primarily affected by
    -- the length of time it's good (more time→more $$$)
    -- the distance of the insured price to the current market price
    (call insurance↓ with higher insured price, put insurance↓ with lower insured price)
    -- the expected jitters ("volatility") of the market at that time.
    (more volatility→more $$$)

    #3 Since options buy&sell insurance, then also, options buy&sell risk.
    Thus understanding the 4 option risk graphs clarifies all sorts of questions:
    No matter how complex or fancy an option trade/strategy might appear,
    it only boils down to an application of the 4 option risk graphs below.



    [​IMG]

    (("Phew!" :wtf: I feel much better now.))
     
    Last edited: Mar 6, 2019
  8. ironchef

    ironchef

    I am truly impressed.

    You must be teaching finance somewhere, to be able to distill into such simple terms. :thumbsup:
     
  9. I hope people don't think they can now trade options-the market preys on stupid
     
  10. ironchef

    ironchef

    When I had my "day job" we had a term for this: OJT, On the job training. You learn faster.
     
    #10     Mar 9, 2019